Few people say they learned how to manage money too early in life. It's a critical skill that can take time to develop. To get kids and teens started out on the right foot, help them put a portion of their earnings to work for their future by saving and investing.
While it may sound like a hard sell, young people say they're interested in investing, with 91% of teens in Fidelity's 2023 Teens and Money Study1 saying they definitely plan to invest in the future—and 3 out of 4 of them plan to start before graduating college or earlier.
Why get teens and kids involved with investing?
Time is the secret ingredient to potential investing success thanks to the compounding that can happen over years and years. Continually saving over time and investing for growth potential can help your money work hard. A diversified mix of investments that matches your time frame and goals may be one of the best ways to seek growth but there can be a catch—it can take time. The good news is the longer your time frame, the less you may need to save and potential compounding growth can do the hard work. The chart below assumes that someone is able to start saving at age 13. They save $500 per year from age 13 through 19. At age 20, they begin saving $1,000 per year and age 25 begin to save $3,000 each year until age 67. Someone who doesn't start saving before age 25 and contributes $3,000 each year until 67 would potentially end up with less money—all else being equal. The saver who started later may need to save more each year if they wanted to catch up with the early saver.
This is just one example of how starting early can help with saving for retirement—shorter-term goals like education or buying a home can benefit too! Find out how teens and even young children can start saving and investing for their future today.
This hypothetical example of an early saver assumes the following: (1) A $500 contribution is made on January 1 every year from age 13 to 20; a $1,000 contribution is made on January 1 every year from age 20 to 25; a $3,000 contribution is made on January 1 every year from 25 to 67. It does not take into account pending Secure Act 2.0 indexing of catch-up contributions. (2) An annual rate of return of 7%, and (3) the ending values do not reflect taxes, fees, or inflation. If they did, amounts would be lower. Illustrations with a 7% rate of return also come with risk of loss.
This hypothetical example of a later saver assumes the following: (1) A $3,000 contribution is made on January 1 and every year from age 25 to age 67, (2) an annual rate of return of 7%, and (3) the ending values do not reflect taxes, fees, or inflation. If they did, amounts would be lower.
For hypothetical illustration only.
Investing involves risk, including risk of loss. Source: Fidelity Investments.
1. Fidelity YouthTM app
Teens can start investing on their own at age 13—with some help from a parent or guardian through the Fidelity Youth Account. The parent or guardian must have an account with Fidelity and open the Fidelity Youth Account for the teen. Unlike a custodial account, where the custodian (in this case the parent) makes the investment decisions on the minor’s behalf, the Fidelity Youth Account is a brokerage account that is owned by the teen, who makes all the investment decisions.
Read Wealth Management Insights on Fidelity.com: Helping your kids become savvy investors
"The parent or guardian has access, they have transparency," Kelly Lannan, senior vice president, Emerging Customers at Fidelity explains. "But they do not need to do things like approve trades. This experience allows a teen to learn by doing."
The account is just one part of the equation—there's also a free app,2 the Fidelity YouthTM app, that teens can use to manage their money, place trades, and earn some money by taking lessons in the learning experience for teens as well. The app also comes with educational resources to help new investors navigate the ins and outs of investing and managing their money. Through the app, teens can ask their parents to add money to the account. The guardian can also see the account activity in the portfolio summary in the regular Fidelity app or on Fidelity.com.
That's not all, the Fidelity Youth app has features that are not available yet on any accounts at Fidelity. One of these is money buckets, a new feature that lets teens organize their money and automatically save a certain percentage toward specific goals. This is our digital version of envelope stuffing. This new feature also lets teens automatically save a certain percentage of any money coming into their account to a money bucket of their choosing.
"Let's say that you're saving for a new pair of shoes. For all the money that comes into your account, you can automate how much of that goes directly into your shoe bucket. We're making it super easy for teens to save for things that they care about," Lannan says.
Extra perks include a debit card with 5 cents back per use3 and no ATM fees in the US.4 Plus there are no subscription fees, account fees, or minimum balance requirements.5
Learn more: Introducing Fidelity YouthTM
2. Roth IRA for Kids
The Fidelity Roth IRA for Kids is a custodial account which means that it's managed by an adult (the custodian) and then the account is transferred to the child at a certain age (generally between 18 and 25; it varies by state).
The main requirement is that a child needs to have earned income. But earnings can come from anywhere—from household chores to a part-time job. Just keep track of how much was earned and what the job was.
"Let’s say your 9-month-old child stars in a commercial and they earn money. They're going to get a 1099 as a contractor, so the IRS can clearly track that. But babysitting money or mowing the lawn also counts, so that is where we recommend tracking these things. You can use a spreadsheet or an app for taking notes to have some kind of documentation," Lannan explains.
Note that the child does not have to use all of their income to contribute to a Roth. If mom, dad, or other relatives want to contribute up to the amount the child has earned that is fine—but you can't contribute more than the child has earned.
What to know:
- The Roth IRA for Kids is the same as a Roth IRA. Contributions have the potential to grow tax-free and withdrawals after age 59½ are tax-free.6
- Contributions can be withdrawn anytime, tax- and penalty-free.
- Withdrawals of earnings before 59½ could be subject to taxes and a 10% penalty but there are exceptions to that rule if 5 years have passed since the first contribution to the Roth IRA for Kids:
- Earnings can be withdrawn penalty-free (but not tax-free) to pay for qualified higher education expenses.
- Up to $10,000 can be withdrawn tax- and penalty-free for a first-time home purchase.
- Money saved in a Roth IRA for Kids is not counted as a student-owned asset for financial aid purposes.
There are even more ways to save for kids including 529 college savings plans, custodial accounts, and the ABLE account. Compare all the options in one place: Saving and investing for a child